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This is one of those stories that provides yet another reason people hate lawyers. As a practicing lawyer myself, I know that sometimes law firms and lawyers take risks and do all the work in the case on the gamble that, if they win the case or it settles, they will get a contingency fee (usually a third of whatever the client is awarded). It’s an investment of sorts. But this case is ridiculous, with law firms involved earning $35,000 per hour that they worked on the case. And, in this case, it was up to the court to award proper legal fees. And Leo Strine, chancellor of the Delaware Court of Chancery failed to perform his duty here. It’s also of note that the award was made in one of these shareholder lawsuits in which the only ones who end up winning are the lawyers, as companies pay out gazillions and the stock price often ends up plummeting as a result, regardless of the outcome of the suit.

The week before Christmas, two plaintiffs law firms got word that together they were awarded $300 million in fees for their work challenging a takeover deal.

The size of the fee, unusually high for shareholder cases, has bankers and lawyers buzzing about whether the Delaware Court of Chancery has become too generous to plaintiffs’ counsel, or is rightly rewarding them for their efforts.

The award comes as the court, the nation’s premium forum for corporate litigation, has proved more willing to grant high payouts when judges think lawyers have worked to earn them . . . .

The award was announced Dec. 19 by Chancellor Leo Strine. For some legal experts, it raises questions about whether Delaware judges, who have criticized the plaintiffs bar for bringing corporate cases in other courts, are trying to show that Delaware is friendly to plaintiffs.

“The message from Delaware would seem to be, ‘bring it on,'” said Professor Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Does the existence of well-compensated plaintiffs bar really create better value for investors? I don’t think so.”

Exactly my point. It’s ridiculous to give these kinds of payouts to lawyers. So what was the case about? Well, in this case, it seems like a ridiculous suit about something that didn’t harm the stockholders as much as the payout to lawyers will.

The value of the Southern Peru shares rose to $3.7 billion by the time the transaction closed in April 2005. Opponents called it a sweetheart deal meant to benefit Grupo Mexico, the largest shareholder in Southern Peru Copper.

The case went to trial in June before Chancellor Strine. In an October ruling, he deemed the transaction “manifestly unfair” and awarded a judgment for Southern Peru that, with interest, now adds up to about $2 billion.

Last week, the judge said the attorneys would get 15% of that amount, or $300 million. The fee is expected to be deducted from the judgment amount, to be paid by Grupo Mexico by giving back some Southern Peru shares.

Grupo Mexico has said it plans to appeal the judgment to the Delaware Supreme Court. If it is overturned, the plaintiffs’ attorneys might receive a greatly reduced compensation, or even none at all. . . .

There is no set rule for how much plaintiffs attorneys in shareholder cases should be rewarded. Generally, the higher the recovery, the lower the percentage the courts dedicate to fees, plaintiffs and defense lawyers say.

The $300 million fee translates into about $35,000 per hour based on the approximately 8,600 hours the plaintiffs’ lawyers said they worked on the case.

They had asked for a fee amounting to 22.5% of the judgment, a figure that the defense said would result “in exactly the type of windfall Delaware courts seek to avoid.” The retainer agreement originally permitted the lawyers to seek up to 30% of the amount recovered.

Can you imagine if the attorneys were granted the typical 1/3 contingency fee they get in other types of cases? Then, they would have received well in excess of $80,000 per hour. Incredible.

Over the years, lawmakers have repeatedly brought up ideas to cap fees for lawyers or reduce the contingency as the award goes up. It’s an idea worth looking at, especially in cases like these, where no lawyer on earth is worth $35,000 per hour.

I’m all for capitalism and entrepreneurs who worked hard and took the risks in business reaping the rewards. But this isn’t about class envy of or attacks on entrepreneurs who took gambles to create products and services to make life better.

It’s about lawyers who filed a lawsuit and got a ridiculous windfall at the expense of companies and shareholders.

25 Responses

It is an obscenity. Legal counsel is most assuredly entitled to reasonable compensation for work performed and risks taken, but not an undeserved windfall. Too many cases like this could lead to legislative reprisals against the legal profession. what was received was more akin to extortion than any form of recovery. Finally, the case itself was pretty weak, since it was not shown that any demonstrable fraud occurred in the article cited. Are poor business and investment decisions now subject to legal review where no misrepresentation or fraud has occurred? What becomes of private enterprise in such situations? Is a freely negotiated and arrived at price for land, labor, or capital between two parties or groups subject to reopening upon the dissatisfaction of one of the contracting parties? If such a decision stands, it will undermine the sanctitity of contracts over time.

Although the lawyers’ fees seem high as presented, from what I’ve read, Judge Strine’s approval of 15% is not unusually high in a class action such as this. Also, the plaintiffs’ attorneys in these cases take enormous risks, because even with all those hours billed and tremendous out-of-pocket costs, the attorneys could lose and receive absolutely nothing from the case. But the stakes are generally a lot higher than for attorneys working on contingency in the personal injury market. In the class action arena of law, it’s “All or Nothing at All” (just like the song closely identified with Frank Sinatra).

From cases I’ve read in the financial press involving Judge Strine, he by no means seems to favor plaintiffs’ attorneys over defense attorneys. In fact, Judge Strine, like most judges of the Delaware Chancery, previously acquired most of his legal experience as a defense attorney.

I recall one case that Judge Strine decided in 2003 that is perhaps more typical of the Delaware Chancery. It concerned a lawsuit against Larry Ellison and Oracle Corp., which was (and is) run by Ellison. While telling the public that Oracle was doing great and would meet or exceed expectations, internally things were not looking so good. Ellison personally sold about $900 million of his Oracle stock and his CFO sold more than $30 million. Then, not too long after, Oracle reported results and Oracle’s results fell substantially below expectations and Oracle’s stock price plunged.

How would you feel if you had bought Oracle’s stock when Ellison was telling you that Oracle was poised to meet or beat expectations, but then you learned that Ellison and his buddies sold enormous amounts of the stock just before telling you the bad news, so that you get caught holding the bag?

As I understand it, the Oracle was pursued not only in the Delaware Chancery, but also in Federal Court. Judge Strine agreed with defendants that although they had their pulse on the company’s activities, they didn’t know that anything bad was going to happen and they just got lucky with the timing of their stock sales. Judge Strine also noted that Ellison only sold about 2% of his holdings, and argued that Ellison would have sold more if he really knew bad news was coming, ignoring that $900 million of loot is a lot of money and would take even Ellison many years to burn through before it got used up. The plaintiffs lawyers lost a lot of money on that case.

In Federal Court, the plaintiffs lawyers fared no better. After years and years, and untold hours and expenses, the judge in the Federal Court threw the case out, representing an enormous loss for the plaintiffs’ attorneys. From all accounts of the story in the business press, if that Federal Oracle case had gone to trial, Ellison could easily have been struck painfully in his pocketbook. I would think that if Ellison and his CFO would have testified, they would have had to present the story that they didn’t know what was going on in the company, and yes, they just got lucky on their stock sales. I think most juries would have problems finding any truth in that story.

So the moral of the story is that yes, sometimes plaintiffs’ can win very big indeed, but they can also lose big time as well.

I do understand the risk argument. However, this is more to this than a business case law study here. The Oracle case was an instance of misleading people about how badly a company was doing. In this situation, the company’s situation was unexpectedly improving. The plaintiffs were upset that they did not receive this unanticipated windfall. Prior to this, assuming all due dillegence was done, the plaintiffs were satisfied. Do we really want to send a message to businesses that they should deliberately sabotoge themselves(engaging in activities to suppress any appreciation in its value) while they are in the process of being sold in order to avoid legal action? Doing so would bring a clase action lawsuit for the opposite reason. Debbie is stating that a legal system has a greater obligation to the public than simply enriching the legal profession inordinately. There are reasonable concerns over whether statutes and case law involved with business activity unduly inhibit the private sector’s ability to innovate, grow, and create employment. One person’s gain is someone else’s loss in a lawsuit. With economic growth, at least potentially, there is a general benefit to everyone. There is no zero-sum game involved with legitimate economic growth. In cases of actual fraud or misleading statements being made about a company, there is a reasonable cause for legal intervention. In a situation where there is seller’s remorse over having struck a poor bargain, is there any real cause for legal action? It would be like you or I blaming a stockbroker for our having sold a share of stock before it had reached its peek value, even though at the time of the transaction were were satisfied with out decision based upon the research we had done. Finally, do we really want a system where the elites can avoid the rigors of a capitalistic system through legal manuevers, while the rest of us have live with out losses since the sums involved would not interest a contingency hungry attorney? That is a situation where the socialists quite legitimately point out a glaring inconsistency.

Debbie
My sincere apologies for asking the question but what is this court case doing in the United States of America? Correct me if I am wrong but does this case not involve 2 different foreign governments essentially.

I do not hold you responsible for the corruption within the law profession. That started back when Abraham Lincoln dishonestly represented the railroads. Lincoln charged outrageous fees at the time. James J. Hill showed this country how to build a railroad.

In our present day just look at Fannie Mae and Freddie Mac just to see how many lawyers and politicians reaped windfall profits at the expense of the American people with no punishment in sight for the perpetrators.

Newt Gingrich for President, what a joke. He has his hands all over Fannie Mae not to mention Nancy Pelosi, Barney Frank, Chris Dodd, Maxine Waters, etc.

I can see now why the ghost of Andrew Jackson supposedly haunts the White House. Jackson truly put the American people ahead of himself.

That’s un-freakin-believable Norm. When the 9/11 attacks happened a live camera crew caught the Palis’ cheers and excitement. They were thrilled about it. Then Arafat showed up and tried to get the massive street crowds to stop cheering. He was waving his arms around almost in a panic. He didn’t want those images getting out for obvious reasons ($) though you know he he almost assuredly agreed with the crowds.

OT

Does this seem too harsh or raaaacist:

“End all threats of Islamic terror by actively seeking to repatriate existing Muslims in America and discontinue all Muslim immigration to the United States.”

Those words will get you banned from Scamela’s website. That’s why SIOA is a faux leftist-leaning nothing.

At least Debbie will allow many views she disagrees with on this site.

Incidentally, I am among the highest paid psychiatrists in the country because I do outrageous call. I make about 350K per year. That comes, incidentally, to less than $200 per hour. Say a really awesome attorney is worth $1000-$2000/hr. This is an outrageous settlement.

Debbie I occassionally get letters saying I’m part of a class action lawsuit but none of them have paid me anything. Allow me to add that as H. and I rocked in the New Year with Dick Clark, a few existential questions came to mInd including could Ryan really be straight, can Justin really play the piano and why was Jenny dry humping that cop. But the one question that really sticks with me is why there are no pictures of you. Maybe it’s a personal safety thing? Anyway, in lieu of pictures, please provide your measurements to your long suffering readers, starting with height and weight. Happy new Year.

In 2012, what will not happen is that the United States court system will never punish the brokerage houses, the Democratic lawyers, and all individuals involved in Fannie Mae, Freddie Mac, and the mortgage scandals.

Fleecing the American public has been the specialty of brokerage houses since the days of Joseph P. Kennedy and the stock market crash of 1929.

There are absolutely no laws to contain the greed, power, and money lust of brokerage houses, Democratic lawyers, mortgage, and loan sharks according to Gretchen Morgenson and Charles Gasparino. In fact European countries, Japan, and China have gotten saddled with our debt for trying to give a house to low income people.

Men like Jimmy Cayne and James A. Johnson and women like Nancy Pelosi will have no problem ripping the American people off along with people from other countries. They will get away with their sins and proceed to concoct another scheme to fleece everybody.

Instead of being the victim, I would prefer to see all of these people either horse whipped, caned, or some form of public humiliation and whipped to attempt to prevent grand scale thefts again. Bernie Madoff can rot in jail but is he truly being punished? How many lives did he ruin with his Ponzi scheme?

Just because a man or woman loses their money in a casino, should the American public be forced to cover that fool’s losses? I think not.

Dunno. A good leverager can add real value added to a client. I have had 3 positive experiences with attornies. Hell, if a fiduciary can solve a problem with a stern letter exchange, then they deserve extra. UK Barristers are allowed to charge premiums. The barrister/solicitor dichotomy isn’t supposed to be as firm in the US. But it is.

Free advice: don’t hire a lawyer through the Yellow Pages; most Bar Assns have a referral service. Referral attornies know better than to break rules. Be sure to ask your lawyer to identify trial issues, and then inquire how they can avoid trial.